Informed Trading in Business Groups, Ownership Concentration, and Market Liquidity
Business groups, which are collections of publicly traded companies with significant amount of common ownership, dominate private sector activity in developing countries. This paper studies how information flows within these groups by analyzing the...
| Main Authors: | , |
|---|---|
| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/05/26419593/informed-trading-business-groups-ownership-concentration-market-liquidity http://hdl.handle.net/10986/24525 |
| Summary: | Business groups, which are collections
of publicly traded companies with significant amount of
common ownership, dominate private sector activity in
developing countries. This paper studies how information
flows within these groups by analyzing the trading behavior
of pension fund managers in firms that belong to the same
group. The paper shows that while pension fund managers are
momentum traders on non-affiliated companies, they trade in
anticipation of future abnormal returns in affiliated firms.
Ownership concentration and business group ties exacerbate
information asymmetries, discouraging investment and
depressing stock market participation. Using the merger and
acquisition activity among pension fund managers as a
natural experiment, the paper provides evidence that
increases in stock ownership concentration, via the threat
of informed trading, adversely affect liquidity. The results
indicate that cross-ownership structures and extensive
investor-industry relations might curb the expected benefits
from the presence of institutional investors, limiting
market development. |
|---|